Capital Market Instruments: Shares

Instruments of Capital Market

• Shares represent ownership in a corporation and are part of the company’s capital.

• Individuals acquiring shares are termed Shareholders.

• Companies issue shares in the stock market to raise capital, which must later be refunded from net profits.

• Two primary types of shares are available:

  • Equity shares offer ownership and voting rights.
  • Preference shares provide fixed dividends without voting rights.

• Bonds are debt securities issued by banks, organizations, and financial institutions to raise funds from the public.

• They come with a commitment to repay the principal with interest within a specified maturity period.

• Types of bonds vary by risk and interest rate (e.g., risk-free bonds, high-interest bonds).

• Bonds are commonly used to finance capital expenses and projects.

• Debentures serve as long-term instruments for borrowing that can be secured against company assets.

• They provide fixed returns, allowing holders to know the amount they will receive upon maturity.

• Debentures are transferable, enabling holders to sell them before redemption.

• Fixed Deposits are bank accounts where the deposited amount is locked in for a specific duration.

• Withdrawals are restricted during this period, and closing the account is necessary to access the funds.

Participants in Money Market

• Central Government borrows through the issuance of Treasury Bills (T-Bills), which carry no risk and are available in terms of 91, 182, and 364 days.

• These T-Bills are primarily purchased by banks and corporations due to their risk-free nature.

• Public Sector Undertakings (PSUs) have shares listed on stock exchanges and can issue commercial papers for working capital needs.

• PSUs typically act as borrowers rather than lenders due to bureaucratic inefficiencies and cash surplus management issues.

• Insurance Companies (both general and life) are generally lenders in the money market because of their cash surplus.

• With the advent of CBLO (Collateralized Borrowing and Lending Obligations), they have become substantial investors in this sector.

• Mutual Funds provide a range of schemes tailored to various investment goals, including Money Market Mutual Fund Schemes which invest in money market instruments to maintain liquidity.

• Banks are significant participants, acting as both borrowers and lenders in multiple markets (call money, short-notice, repo, and reverse repo markets).

• Banks borrow from entities like the RBI and IDBI, while also lending via commercial paper and Certificate of Deposits.

• Corporates utilize commercial papers as financial instruments to raise short-term capital.

This quiz explores the concept of shares as a fundamental instrument in capital markets. You'll learn about ownership, shareholder roles, and the process of issuing shares by companies. Test your understanding of how shares contribute to a company's capital and net profit.